Opinion

Financial literacy: Helping
overseas migrant workers
create wealth

Indonesia’s 4 million overseas migrant workers and their families are underserved by formal financial services and possess limited levels of financial literacy.

Improving not only access to formal financial services, such as savings, credit, remittance and insurance products, but also awareness of these products and the skills necessary to use them, could greatly improve the well-being of migrant workers’ households.

Access to financial products and financial literacy are of particular importance for managing the vast amounts of remittance funds sent home by Indonesian migrant workers, which total to nearly US$7 billion annually. Starting in 2009, the World Bank undertook a pilot program to assess the impacts of providing financial literacy training to these households.

The program found that financial literacy training for Indonesian migrant workers and their families has significant impacts on financial knowledge and behavior.

Specifically, overall awareness of financial terminology increased, savings rates rose, use of debt declined, awareness of migrant worker insurance improved and budgeting and financial planning habits became more frequent.

Indonesia is the second largest source of labor migration in Asia after the Philippines.

Bank Indonesia reported that as of Q1 2012, there were over four million Indonesian overseas migrant workers working abroad, predominantly in Southeast Asia and the Middle East.

Estimated net remittances by Indonesian overseas migrant workers amounted to $6.7 billion in 2011. In 2011, 68 percent of all Indonesian overseas migrant workers were female, nearly all of whom worked as live-in domestic workers.

These women come mostly from rural areas and from poor households. Thus, most of their remitted earnings flow directly to low-income communities.

Much evidence exists showing the link between access to financial services and poverty reduction.

However, access to financial services remains a major issue for overseas migrant workers before their departure overseas, during their working contract abroad, and after their return home.

A World Bank diagnostic study of access to finance for overseas migrant workers’ households in 2010 concluded that low financial literacy is a key impediment.

Typically, migrant workers have limited access to information on financial services, such as remittance channels, savings, credit and insurance, as well as limited knowledge of financial planning and management.

These limitations could prevent Indonesian overseas migrant workers’ households from realizing
the full benefit that the overseas income could have on their standards of living.

To address issues of financial literacy, the World Bank in partnership with the government, initiated a pilot program on financial literacy education for Indonesian overseas migrant workers and their families.

This program aimed to understand the impact of financial literacy training on overseas migrant workers’ households and to determine whether training should target the migrant worker alone or should include the family member who would receive remittances from abroad.

The results showed that financial literacy training significantly improved both financial knowledge and behaviors when targeted at the migrant worker and her family. Training the migrant or family member alone had more moderate impacts. Three major areas of financial knowledge are addressed in the program.

First, financial awareness, which tests for understanding of basic financial concepts such as interest rates, exchange rates, transaction fees, saving accounts, budgeting and insurance; second, applied financial knowledge, which tests whether respondents can offer financial advice such as whether or not borrowing money to purchase a television is income-producing; and third, financial numeracy skills, which tests for the respondents’ ability to make basic calculations such as finding the cheapest loan option among a set of loan terms.

When both the migrant worker and a family member were trained, the training had strong positive impacts on savings rates and loan usage. The amount of remittances going into savings doubled, while the percentage of respondents using debt following the training declined by 27 percent.

These behavioral changes allow migrant workers’ households to build a base of savings for use in financing children’s education, starting a business or purchasing income-producing assets, while reducing reliance on high-interest loans.

This behavior change is critical in helping overseas migrant workers’ households limit unnecessary expenditures that could lead to financial difficulty and ultimately to reliance on debt.

The conclusion is that financial literacy training should be provided to Indonesian overseas migrant workers and their family members in order to prepare these households to make informed financial decisions.

More broadly, communities containing a large proportion of overseas migrant workers’ households would also benefit from financial literacy training.

There are several specific policy recommendations with respect to overseas migrant workers.

Training at recruitment centers should cover financial planning and management, debt management, the importance of savings, remittances, and insurance. Pre-departure training conducted by the National Agency for the Placement and Protection of Indonesian Overseas Workers (BNP2TKI) and the Agency for the Service, Placement and Protection of Indonesian Overseas Workers (BP3TKI) could include a “refresher session” to review topics learned during training sessions at recruitment centers.

Orientation sessions conducted by Indonesian embassies or consulates general in host countries could include financial topics, which should focus on savings and use of formal remittance channels.

A unified effort between ministries and agencies to improve financial literacy among migrant worker communities would also be welcome. Positive examples of this kind of synergy so far are an MoU between Bank Indonesia and the Manpower and Transmigration Ministry regarding financial literacy training for overseas migrant workers, and BNP2TKI financial
literacy training conducted as part of its mid-term development plan for 2010-2014.

Overall, Indonesia’s overseas migrant workers are making a valuable contribution toward supporting their families and creating wealth for the future that will help drive the broader Indonesian economy.

This could be better served by promoting financial literacy training nationwide for all those planning to work overseas.

The writer is a consultant for the World Bank’s financial literacy program in Jakarta. The opinions expressed are her own.

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